Trade secret

The examples and perspective in this article deal primarily with the United States and do not represent a worldwide view of the subject. Please improve this article and discuss the issue on the talk page.(August 2011)

A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers.[1] In some jurisdictions, such secrets are referred to as "confidential information", but are generally not referred to as "classified information" in the United States, since that refers to government secrets protected by a different set of laws and practices.

The precise language by which a trade secret is defined varies by jurisdiction (as do the particular types of information that are subject to trade secret protection). However, there are three factors that, although subject to differing interpretations, are common to all such definitions: a trade secret is information that:

Is not generally known to the public;

Confers some sort of economic benefit on its holder (where this benefit must derive specifically from its not being publicly known, not just from the value of the information itself);

By comparison, under U.S. law, "A trade secret, as defined under 18 U.S.C.§ 1839(3) (A), (B) (1996), has three parts: (1) information; (2) reasonable measures taken to protect the information; and (3) which derives independent economic value from not being publicly known".[3]

Trade secrets are by definition not disclosed to the world at large. Instead, owners of trade secrets seek to protect trade secret information from competitors by instituting special procedures for handling it, as well as technological and legal security measures.[4] Legal protections include non-disclosure agreements (NDA) and non-compete clauses. In exchange for an opportunity to be employed by the holder of secrets, an employee may sign an agreement not to reveal his or her prospective employer's proprietary information. An employee may also surrender or assign to his employer the right to his own intellectual work produced during the course (or as a condition) of employment. Violation of the agreement generally carries the possibility of heavy financial penalties. These penalties operate as a disincentive to reveal trade secrets. However, proving a breach of an NDA against a former employee who is legally working for a competitor can be very difficult.[5] A holder of a trade secret may also require similar agreements from other parties he deals with, such as vendors or licensees.

A company can protect its confidential information through non-compete and non-disclosure contracts with its employees (within the constraints of employment law, including only restraint that is reasonable in geographic- and time-scope). The law of protection of confidential information effectively allows a perpetual monopoly in secret information – it does not expire as would a patent. The lack of formal protection, however, means that a third party is not prevented from independently duplicating and using the secret information once it is discovered.

Secret formulae are often protected by restricting the key information to a few trusted individuals. Famous examples of products protected by trade secrets are Chartreuse liqueur and Coca-Cola.[6]

Protection of trade secret can, in principle, extend indefinitely and therefore may provide an advantage over patent protection, which lasts only for a specific period of time. Coca-Cola, for example, has no patent for its formula and has been very effective in protecting it for many more years than the twenty years of protection that a patent would have provided. In fact, Coca-Cola refused to reveal its trade secret under at least two judges' orders.[7] The disadvantage is that there is no protection once information protected as trade secret is uncovered by others through reverse engineering, for example, whereas patent has a guaranteed time of protection in exchange for disclosing the information to the public.

Companies often try to discover one another's trade secrets through lawful methods of reverse engineering or employee poaching on one hand, and potentially unlawful methods including industrial espionage on the other. Acts of industrial espionage are generally illegal in their own right under the relevant governing laws. The importance of that illegality to trade secret law is as follows: If a trade secret is acquired by improper means (a somewhat wider concept than "illegal means" but inclusive of such means), the secret is generally deemed to have been misappropriated. Thus if a trade secret has been acquired via industrial espionage, its acquirer will probably be subject to legal liability for acquiring it improperly. (The holder of the trade secret is nevertheless obliged to protect against such espionage to some degree in order to safeguard the secret. Under most trade secret regimes, a trade secret is not deemed to exist unless its purported holder takes reasonable steps to maintain its secrecy.)[citation needed]

Commentators starting with A. Arthur Schiller assert that trades secrets were protected under Roman law by a claim known as, "actio servi corrupti", interpreted as an "action for making a slave worse" (or an action for corrupting a servant). The Roman law is described as follows:

[T]he Roman owner of a mark or firm name was legally protected against unfair usage by a competitor through the actio servi corrupti ... which the Roman jurists used to grant commercial relief under the guise of private law actions. "If, as the writer believes [writes Schiller], various private cases of action were available in satisfying commercial needs, the state was acting in exactly the same fashion as it does at the present day."[8]

The suggestion that trade secret law has its roots in Roman law was introduced in 1929 in a Columbia Law Review article called "Trade Secrets and the Roman Law: The Actio Servi Corrupti", which has been reproduced in Schiller's, An American Experience in Roman Law 1 (1971). See Trade Secrets and Roman Law: The Myth Exploded, at 19. However, the University of GeorgiaLaw School professor Alan Watson argued in Trade Secrets and Roman Law: The Myth Exploded that the actio servi corrupti was not used to protect trade secrets p. 19. Rather, he explained:

Schiller is sadly mistaken as to what was going on. ... The actio servi corrupti presumably or possibly could be used to protect trade secrets and other similar commercial interests. That was not its purpose and was, at most, an incidental spin-off. But there is not the slightest evidence that the action was ever so used. In this regard the actio servi corrupti is not unique. Exactly the same can be said of many private law actions including those for theft, damage to property, deposit, and production of property. All of these could, I suppose, be used to protect trade secrets, etc., but there is no evidence they were. It is bizarre to see any degree the Roman actio servi corrupti as the counterpart of modern law for the protection of trade secrets and other such commercial interests.[8]

Trade secret law as we know it today made its first appearance in England in 1817 in Newbery v James,[9][dubious– discuss] and in the United States in 1837 in Vickery v. Welch.[10][11][clarification needed] While those cases involved the first known common law causes of action based on a modern concept of trade secret laws, neither involved injunctive relief; rather, they involved damages only.[11] In England, the first case involving injunctive relief came in 1820 in Yovatt v Winyard,[12] while in the United States, it took until the 1866 case Taylor v. Blanchard.[13][14][clarification needed]

Trade secrets law continued to evolve throughout the United States as a hodgepodge of state laws. In 1939, the American Law Institute issued the Restatement of Torts, containing a summary of trade secret laws across states, which served as the primary resource until the latter part of the century. As of 2013, however, only four states—Massachusetts, New Jersey, New York, and Texas—still rely on the Restatement as their primary source of guidance (other than their body of state case law).[citation needed] It has also been recently[when?] theorized that the doctrine of trade secrets should protect competitively valuable, personal information of company executives, in a concept known as "executive trade secrets".

Although trade secrets law evolved under state common law, prior to 1974, the question of whether patent law preempted state trade secrets law had been unanswered. In 1974, the United States Supreme Court issued the landmark decision, Kewanee Oil Co. v. Bicron Corp., which resolved the question in favor of allowing the states to freely develop their own trade secret laws.[15]

In 1979 several U.S. states adopted the Uniform Trade Secrets Act (UTSA), which was further amended in 1985, with approximately 47 states having adopted it as the basis for trade secret law. Another significant development is the Economic Espionage Act of 1996 (18 U.S.C.§§ 1831–1839), which makes the theft or misappropriation of a trade secret a federal crime. This law contains two provisions criminalizing two sorts of activity. The first, 18 U.S.C.§ 1831(a), criminalizes the theft of trade secrets to benefit foreign powers.The second, 18 U.S.C.§ 1832, criminalizes their theft for commercial or economic purposes. (The statutory penalties are different for the two offenses.)

The test for a cause of action for breach of confidence in the common law world is set out in the case of Coco v. A.N. Clark (Engineers) Ltd:[17]

The information itself must have the necessary quality of confidence about it;

That information must have been imparted in circumstances imparting an obligation of confidence;

There must be an unauthorized use of that information to the detriment of the party communicating it.

The "quality of confidence" highlights that trade secrets are a legal concept. With sufficient effort or through illegal acts (such as break and enter), competitors can usually obtain trade secrets. However, so long as the owner of the trade secret can prove that reasonable efforts have been made to keep the information confidential, the information remains a trade secret and generally remains legally protected. Conversely, trade secret owners who cannot evidence reasonable efforts at protecting confidential information, risk losing the trade secret, even if the information is obtained by competitors illegally. It is for this reason that trade secret owners shred documents and do not simply recycle them.[citation needed]

A successful plaintiff is entitled to various forms of judicial relief, including:

In the United States, trade secrets are not protected by law in the same manner as trademarks or patents. Specifically, both trademarks and patents are protected under federal statutes, the Lanham Act and Patent Act, respectively. Instead, trade secrets are protected under state laws, and most states have enacted the Uniform Trade Secrets Act (UTSA), except for Massachusetts, New York, and North Carolina. One of the differences between patents and trademarks, on the one hand, and trade secrets, on the other, is that a trade secret is protected only when the secret is not disclosed.

To acquire rights in a trademark under U.S. law, one must simply use the mark "in commerce".[18] It is possible to register a trademark in the United States, both at the federal and state levels. (Registration of trademarks confers some advantages, including stronger protection in certain respects, but it is not required in order to get protection.)[18] Registration may be required in order to file a lawsuit for trademark infringement. Other nations have different trademark policies and this information may not apply to them. Assuming the mark in question meets certain other standards of protectibility, it is protected from infringement on the grounds that other uses might confuse consumers as to the origin or nature of the goods once the mark has been associated with a particular supplier. (Similar considerations apply to service marks and trade dress.) By definition, a trademark enjoys no protection (qua trademark) until and unless it is "disclosed" to consumers, for only then are consumers able to associate it with a supplier or source in the requisite manner. (That a company plans to use a certain trademark might itself be protectible as a trade secret, however, until the mark is actually made public.)

To acquire a patent, full information about the method or product has to be supplied to the patent office and upon publication or issuance, will then be available to all. After expiration of the patent, competitors can copy the method or product legally. The temporary monopoly on the subject matter of the patent is regarded as a tradeoff for thus disclosing the information to the public.

One popular misconception held by many is that trade secret protection is incompatible with patent protection. It is typically said that if you apply for a patent you can no longer maintain a trade secret on the invention, but this is an oversimplification.[19] It is true that in order to obtain a patent you must disclose your invention so that others will be able to both make and use the invention, and, to obtain a patent in the United States, if you have any preferences you must likewise disclose your preferences.[20] What is typically not appreciated though is that the critical time for satisfying this disclosure requirement is at the time the application is filed. In many if not most situations, improvements will be made to an invention even after filing of the patent application, and additional information will be learned. None of this additional information must be disclosed and can instead be kept as a secret.[21] Virtually all patent licenses include clauses that require the inventor to disclose any trade secrets they have. Frequently it is this information not disclosed in the patent that is the most commercially viable. Thus, if you are attempting to sell or license your patent rights you want to make sure that you take steps to continue to maintain your trade secrets as secrets, otherwise they will be lost. Accordingly, before disclosing any secrets not already protected by an issued patent you should use a non-disclosure agreement.

Compared to patents, the advantages of trade secrets are that a trade secret is not limited in time (it "continues indefinitely as long as the secret is not revealed to the public", whereas a patent is only in force for a specified time, after which others may freely copy the invention), a trade secret does not imply any registration costs,[22] has an immediate effect, does not require compliance with any formalities, and does not imply any disclosure of the invention to the public.[22] The disadvantages of trade secrets include that "others may be able to legally discover the secret and be thereafter entitled to use it", "others may obtain patent protection for legally discovered secrets", and a trade secret is more difficult to enforce than a patent.[23]

When trade secret regulations are used to mask the composition of chemical agents used by consumers, they have come under criticism for allowing to hide the presence of potentially harmful and toxic ingredients. It has been argued that it is the public that is being denied a clearer picture about the safety of a product whereas competitors are well in a position to analyze its chemical composition.[24] Thus in 2004, the National Environmental Trust tested forty common consumer products and found in more than half of them toxic substances not listed on the product label.[24]